Regulation of the Litigation Funding Industry - to License or not to License

Recent decisions in superior Courts in Australia have established that litigation funding agreements are financial products and fall under the regulatory provisions of the Corporations Act 2001. Those provisions require that funders hold an appropriate licence and that they comply with the relevant provisions of the Act, put in place to protect investors, clients and the public. However, proposed statutory regulations would have the effect of removing virtually all of the protective mechanisms provided by the Act which currently govern the activity of litigation funders in Australia, including the requirement to hold a licence. IMF opposes the proposed regulations and supports a properly regulated industry.
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Duelling Class Actions Settled

Earlier this year, two sets of shareholder claims against Oz Minerals Ltd were settled. Court approval of the settlements were granted on 1 July 2011. The duelling OZ Minerals claim settlements show that similar claims against one respondent can be settled but at greater cost and delay than where one claim proceeds.
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ASIC Centro Win Bolsters Class Actions

In June 2011, the Australian Securities and Investments Commission (ASIC) won its case against the directors and senior management who had led the Centro Group in 2007. The Federal Court held that they had all breached their statutory duties in relation to the final accounts which were published by two Centro entities in that year. In a subsequent decision, penalties were imposed on all of the respondents, including the former Centro Chief Executive Officer and Chief Financial Officer. ASIC's success in the Federal Court has provided important support to current and former Centro investors who are claiming compensation in three class actions being funded by IMF against Centro entities.
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Court orders discovery from group members

The Victorian Supreme Court of Appeal (CA) has again recently considered the issue of discovery being requested from group members in a class action. In this decision, the CA upheld an order that 14 class members must provide particulars and discovery of documents, in circumstances where the documents were required to assist a mediation.
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Key trends in US securities class action litigation in 2012 – leads and lessons for Australian claims

Each year, NERA Economic Consulting publish a review of trends in securities class action litigation in the United States. While there are many structural differences between securities class action litigation in the United States and in Australia, certain themes from NERA’s analysis of the trends in the United States are of interest to class action participants and observers in Australia.
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Update on regulation of litigation funding

Two important events have occurred since our last issue which indicate that there will be little or no regulation of litigation funding in Australia in the foreseeable future. First was the decision of the High Court in the Chameleon case. The second event was the issue of regulations by Treasury.
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Opt-out actions in the US

Unlike Australia, the typical US securities fraud class action is conducted on an open class basis. As a result, Australian investors exposed to US stocks may, not infrequently, need to consider whether to remain in the securities class action, or to take the decision to opt out of the class action and run their own separate legal action. Data from the US is now showing that investors who choose to opt out of securities fraud class actions and run their own actions are frequently achieving far larger recoveries.
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ASX review of continuous disclosure guidance note

In March 2013, the Australian Securities Exchange (ASX) issued a final revised version of Guidance Note 8 relating to ASX Listing Rules 3.1 – 3.1B, following a public consultation. Listing Rules 3.1 - 3.1B set out the continuous disclosure obligations of listed entities. The Guidance Note was reviewed by ASX and ASIC, as a result of industry pressure that it would benefit from an update following developments in recent years.
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Centro settlement sets record but do questions remain?

In June 2012, the Federal Court in Melbourne approved the settlement of the Centro class actions for $200 million. The litigation arose from Centro misclassifying multi-billion dollar short term interest-bearing liabilities as long-term liabilities in its 2007 preliminary and final accounts. The accounts had been approved by the Centro board and published to the market. When the true position was revealed, the price of Centro’s securities fell dramatically causing serious losses to investors. While the class actions were ongoing, the Australian Securities and Investments Commission also successfully pursued the former Centro directors and senior executives (who oversaw the 2007 accounts) for civil penalties. Despite the very successful outcome to this litigation, some commentators have raised questions about it. Fears have also been expressed over whether the Centro result will lead to a surge in class action activity. These concerns are unwarranted.
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Class Actions in Australia - review of second edition

The first edition of “Class Actions in Australia” was published in 2005 and written by Freehills’ partners, Damian Grave and Ken Adams. It has now been followed by a second edition, with fellow partner, Jason Betts, a co-author with Grave and Adams, adding his considerable strength to the oars.
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A regulatory mess

IMF has held an Australian Financial Services Licence since 2005. Following a superior court decision in 2011, all litigation funders in Australia should be licensed, unless they have been provided with an exemption under the Corporations Act. No other litigation funder carrying on business in Australia has sought or been provided with a licence. However, there is a temporary order in place from ASIC which exempts all funders from holding a licence. Regulations have now been promulgated which dispense with the requirement for a funder to hold a license for multi-party arrangements, although not for single party arrangements. On top of this confusing position, it is IMF’s view that the regulations do not achieve their intended effect.
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Lifting the cloak on insurers behind litigation

Recent reforms in the commercial courts of Western Australia aim to make “third parties” more accountable. They compel “third parties”, such as insurers and litigation funders, to formally notify the court of their involvement in any proceedings. The amendments seek to ‘lift the cloak’ on those that control litigation and ensure they are more accountable for their conduct in promoting or impeding proceedings. They also impose upon these third parties certain duties to the court - in the same way that the litigants in the proceedings and their lawyers owe duties. These reforms are welcome because they encourage the just, quick and cheap resolution of commercial disputes and other Australian jurisdictions should follow WA’s lead.
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Common fund for shareholder class action by consent

Part IVA of the Federal Court Act created a class action regime in which initial individual consent of group members to be included is not required. The continued involvement in the class is determined at a later stage when the "opt out" process is conducted. In Pathway Investments Pty Ltd v National Australia Bank Limited, orders by consent were made in August 2012 creating an opt out process for that action. These orders are the first time that a court has required class members who have not entered into a funding agreement to pay commission in the same way as funded class members in the event they wish to participate in any fund created with the benefit of litigation funding.
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No second bite of the cherry … once you opt out, it may be hard to get back in

In 2007, certain class actions were filed in the Federal Court by travel agents seeking payment of the agent’s commission on the fuel surcharge component of published international airfares. Claims were filed against, amongst others, Qantas and Singapore Airlines. WebJet was a group member in the Singapore Airlines action and decided to opt out of that action. Earlier this year WebJet applied to be reinstated as a group member so that it could participate in a settlement. The application was refused and characterised as opportunistic.
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Court of Appeal declines to order discovery from group members

The nature of class actions is that there is a representative who is responsible for running the action. That action will include issues common to the group members and issues in relation to the representative’s own case on liability and damages. Group members are not a party to the class action and the general rule is that the court will not make orders requiring them to give discovery of their documents to the defendant unless there are compelling reasons justifying the orders. However, orders will be made which are "demonstrably necessary for the fair and just determination of a defendant's case". This issue arose recently in a class action in which National Australia Bank sought orders for the particulars of the identity of certain group members and discovery from those members. The court at first instance refused the orders and, in August 2012, the Victorian Supreme Court of Appeal upheld the decision.
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Trans-Atlantic securities class action settlement - collective redress for investors in the Netherlands

In January 2012, the Court of Appeal in Amsterdam approved two international settlement agreements for investors who purchased shares in Converium Holding AG (now SCOR Holding AG) on both the New York and Swiss stock exchanges. Converium is a Swiss reinsurance company. The cases asserted claims that Converium and its parent company, Zurich Financial Services, failed to disclose inadequacies in Converium's loss reserving which resulted in material overstatements to Converium's earnings and assets.
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Olympus case discloses shortcoming in Japanese law

Since the 2006 changes to Japan's Financial Instruments and Exchange Act (FIEA), making it easier for victims of share market abuse to seek compensation, you would have expected an increase in claims and payouts and therefore enhanced deterrents. However, it is unlikely that the Japanese legislature will achieve its objectives, as indicated recently in the Olympus case.
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US regulatory news

As part of its Ethics 20/20 Commission, the American Bar Association recently issued a draft white paper that considered various issues regarding lawyers' involvement with the growing use of alternative litigation financing. The draft white paper concluded that there was no need to adjust the existing rules of professional conduct for lawyers acting in matters that involved litigation financing. It recommended that lawyers should approach such transactions with care and be aware of their professional obligations under existing rules.
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Discovery from group members not required

In a recent case in the Victorian Supreme Court, Justice Pagone held that group members of a class action did not need to provide discovery of documents sought by the National Australia Bank (Pathway Investments Pty Ltd & Anor v National Australia Bank Limited [2012] VSC 72).
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Common Fund for shareholder class actions

Dr Peter Cashman (Barrister and Professor of Law at the University of Sydney) presented a paper at IMF's recent shareholder class action conference on the use of a "common fund" for shareholder class actions. Dr Cashman's paper questions whether an order may be obtained for the payment of a litigation funder's commission at the commencement of the proceedings, by way of a share of any settlement or judgment proceeds that are received, subject to the class member's right to opt out.
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